FOOL ON THE HILL
Tolled: The Information Superhighway

On the Internet, the more things change, the more they remain the same. Reverting back to its pay-for-play roots, the World Wide Web is proving to be a fickle landlord for those who had taken free rent for granted. With a few dot-com companies successfully launching subscriber programs, it's no longer a matter of whether or not it will work, but, rather, whom will it work out for and what will folks be willing to pay up for.

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By Rick Aristotle Munarriz (TMF Edible)
February 13, 2002

Who moved my free slab of Roquefort? You see, my wife missed the Super Bowl ad with the Clydesdale horses paying their respects to those lost at Ground Zero. No problem. Get thee to AdCritic.com. Only, go figure, the site is gone.

"Our business, although strong, has been unable to weather the current economic realities besieging the United States today," apologizes AdCritic. "The short answer: we became so popular so fast that we couldn't stay afloat!"

Strong. Popular. Not buoyant. If pride sinks in the quicksand, does it make a guttural sound? Obviously you know where I'm going with this. Depending on when these words reach you, there's a chance that you might be either one of the last charter members of The Fool Community or one of the first non-charter pioneers. Like a free club slapping on a cover charge, there has been a wide range of community reaction. Is charging elitist or just common business sense?

The bigger picture is telling. The free Internet just isn't as free as it used to be. The naysayers have had a field day, but the results tell a different story. Pundits figured that RealNetworks (Nasdaq: RNWK) would never get people to open up their wallets for streaming media. It now has 500,000 paying subscribers. Will folks pay to play games online? Electronic Arts (Nasdaq: ERTS) generated $21.9 million in EA.com revenue this past quarter and despite the heavy overhead it's ready to turn the corner towards profitability in online gaming. Pay for written online content? Salon.com has more than 35,000 readers nodding their heads.

On the surface, this might appear be the ultimate betrayal. Tollbooths on the information superhighway? The horror! But is it so outlandish? After all, nobody said it was a freeway, simply a highway. The brief history of the Internet explains a whole lot.

Before investors got excited about the Internet, online services had to justify their expenses. CompuServe, Prodigy, and GEnie were the handiwork of stodgy companies like H&R Block (NYSE: HRB), Sears (NYSE: S), and General Electric (NYSE: GE). They weren't in it for revolutionary rites. It was business. Consumers paid for accessing what was often their own bulletin board and chatroom content, the way a telephone company will charge you for that cross-country call or a conference center will slip you the bill for meeting space.

As a matter of fact, when GE decided that GEnie was no longer worth bottling it was hard-pressed to find a new owner. Yes, there was a time before now -- like now -- when online and unloved went hand in hand.

Sandwiched between these bookends of economic reality we had the cream filling of the dot-com boom. With advertisers and venture capitalists pouring in, seed capital became the subsidy of the unsustainable. E-commerce upstarts operating at negative gross profit margins. Content sites giving away what they couldn't afford as long as someone kept feeding the meter.

Yet, the same people who now slap their foreheads because they should have seen the dot-com crash coming now find themselves at a loss as to why the Internet is no longer the bastion of freeness it was just years ago.

The Internet is the great leveler, only some people still can't figure out what hit them. Let me be clear on this: The Web has and will continue to be a provider of free information. However, that will be the case if it's in the best interest of the company behind the domain to make it so. You will probably always have access to a company's press releases, financial statements, and SEC filings at the company's website itself because the bandwidth required to transmit that information and the storage costs behind it are less than the traditional fulfillment costs of taking the phone requests and mailing them out. The same goes for everything from IRS tax forms to directions to Aunt Betty's family reunion. The Clydesdale ad? It was ultimately waiting for me at Budweiser.com.

You also have companies where selling online makes sense. Consumer direct companies like Dell (Nasdaq: DELL) and especially those with commissionable middlemen like United Airlines parent UAL (NYSE: UAL) are able to save plenty through automated transaction interfaces on their sites. Saving money, before one even begins to consider the advances in convenience, is just good business.

So where does that leave everybody else? Well, you need a business plan that is both a business and a plan -- and, while you're at it, gallons of correction fluid couldn't hurt. Where would eBay (Nasdaq: EBAY) be today if it didn't charge for listings? I've seen the quality of the auctions at the free sites and I shudder to think what the company's income statement would look like if that were the case for eBay.

Even Yahoo! (Nasdaq: YHOO), that master of services aggregation, has come to realize that eyeballs alone don't pay the rent. It already began charging for auction listings and its plan to return to profitability revolves around getting users to pay for what was once taken for granted.

Lost in all this is the fact that membership has its privileges. Just as a paying magazine subscriber has more collateral with the publisher than someone who picks up a free daily at the corner rack, the retooling of the Internet puts the end user back in a position of power as someone whose specific needs must be catered to. You have always known the Web for its convenience. In the years to come, you are will discover it for the level of service it can provide as well.

The year before Pets.com went public the company's cost of goods sold ran at 132% of sales. That means that for every buck you spent on a bird feeder or a hamster wheel, there was some venture capitalist signing off for another 32 cents. And this was before we even burrowed into operating costs. It was sanctioned looting, plain and simple. It was as sustainable as the Scott Baio Fan Club. So, sure, cyberspace used to be a free lunch, but did anyone truly relish wolfing down pilfered meat? 

The shift from customer acquisition to customer retention shouldn't surprise anyone. But the fact that the level of dedication will rise with the water will catch many by surprise. The quest for eyeballs led a lot of smart companies to do some very dumb things. The new challenge to retain the eyeballs worth keeping has quality companies realizing that there is no fine print in a business plan. If you can't create something worth paying for, you're little more than an emperor of ice cream on a hot summer day.

Why? Because the company setting up shop on the Net has investors, employees, and families to feed. The guy setting up an unofficial tribute page to Sara Michelle Gellar only needs to feed his ego.

The issue isn't how much something cost you yesterday. It's how much it is worth to you tomorrow. It's not a matter of who pulled up the tree and erected a tollbooth, rather, where does the paved road on the other side lead to?

Are we there yet?

-- Rick Munarriz, TMFEdible on the Fool Discussion Boards

Rick Aristotle Munarriz always likes to line up spare change so he can glide past the "Exact Change" tollbooths. He would also like to point out that he just opened The Edible Caf�. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.